Suppose you bought a bond with a coupon rate of 8.4 percent one year ago for $90

Question

Suppose you bought a bond with a coupon rate of 8.4 percent one year ago for $907. The bond sells for $946 today.

Assuming a $1,000 face value, what was your total dollar return on this investment over the past year?

What was your total nominal rate of return on this investment over the past year?

If the inflation rate last year was 4.4 percent, what was your total real rate of return on this investment?

Assuming a $1,000 face value, what was your total dollar return on this investment over the past year?

What was your total nominal rate of return on this investment over the past year?

If the inflation rate last year was 4.4 percent, what was your total real rate of return on this investment?

Explanation / Answer

a)

Dollar return is $39 ($946-$907)

b)

Nominal rate of return:

= ($946-$907+$84)÷$907

= 13.56%

c)

(1+Nominal rate) = (1+Real rate)×(1+Inflation rate)

(1+13.56%) = (1+Real rate)×(1+4.4%)

Real rate of return = 8.77%

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